Definition

The term workforce reduction refers to a corporate effort to lower costs through the termination of a relatively large number of employees. The need for a reduction in workforce can be driven by internal as well as external factors.

Explanation

Also known as downsizing and rightsizing, corporations typically embark on a workforce reduction effort to increase earnings. The term is normally associated with a wide-reaching program that ultimately results in the termination of a relatively large number of the company's employees. The perceived need to downsize an organization is usually driven by a number of factors, including:

Poor management decisions that allowed the number of employees in an organization to grow beyond the demand for their services.

Economic conditions, such as a recession, that results in a decline in the demand for the company's products or services.

Customer dissatisfaction with product quality or the reputation of a company, resulting in a decrease in sales.

The first step in a rightsizing effort is usually a bottom-up assessment of workload in various areas. This assessment can result in the elimination of entire divisions, or a decision to close a specific operating plant. Ultimately, a new organization will be designed that has significantly fewer employees.

Companies also have the option of lowering costs by instituting a hiring freeze, reducing overtime, and lowering salaries. The workforce reduction process can also be made more palatable by providing employees with career counseling, outplacement services, exit incentives, or severance pay.